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OPINION | THE ECONOMY

What's in a Trade Statistic? Less and Less

August 19, 2001|JOCK O'CONNELL | Jock O'Connell is an international business consultant

SACRAMENTO — California's robust export trade has inspired frequent flights of chauvinism in Sacramento, where politicians of both parties enjoy reveling in the conceit that, were it something it's not (i.e., a separate country), the Golden State would be the world's fifth-largest economy.

California exports reportedly rose 13.2%, to $30.2 billion, in the first three months of 2001, the fourth consecutive quarter in which state exports topped $30 billion and the seventh consecutive quarter of positive export growth. According to preliminary estimates, however, that streak likely ended in 2001's second quarter. (Final figures won't be available until later this summer.)

This news shouldn't be surprising. Economic growth in virtually every major market has ebbed during the last several months. But that probably won't stop Sacramento legislators and lobbyists from seizing upon the disappointing trade figures to advance various policy agendas. The predictable result will be a plethora of pithy sound-bites demonstrating, if nothing else, how little is understood about what the trade data really tell us.

The fact is, in the emerging global economy, statistics on imports and exports are fast becoming meaningless barometers of international commerce.

This is not to say that cross-border trade is unimportant. By conventional measures, merchandise exports now account for nearly 12% of the U.S. gross domestic product, roughly double what its share was in 1975. But trade data do not tell the whole story of the connective tissue of globalization.

Shipping goods across borders is not the only or even the most important way in which California companies do business overseas. Ever since the laying of the first transatlantic telegraph cable in 1866, U.S. firms have been investing in manufacturing plants abroad to avoid the high costs of shipping their wares from the United States, as well as to skirt tariffs and other import restrictions. This trend has accelerated in recent decades because of a host of international trade agreements that have bolstered legal safeguards for foreign investors. The most recent data, that of 1998, show that sales made by foreign subsidiaries of U.S. firms totaled some $2.4 trillion, while total U.S. merchandise exports that year amounted to a comparatively modest $933 billion.

Separate figures on the sales of California companies' overseas subsidiaries are not kept. However, the 2.5 to 1 ratio of overseas sales to exports for the country as a whole suggests that the foreign subsidiaries of California firms reaped some $270 billion in sales in 1998, a year in which the state's merchandise exports amounted to $105 billion.

As more and more companies learn to manage global supply chains, the meaning of trade statistics will become less and less clear. Ironically, it's conceivable that a decline in a country's merchandise export trade could actually be a favorable sign that the national economy is shifting away from an old-economy model based on mass manufacturing to a new one geared to produce high value-added products and services.

Because of the links between U.S.-based firms and their affiliates abroad, a substantial portion of America's trade can be more appropriately characterized as intracompany. In 2000, intracompany trade accounted for $563 billion (47%) of U.S. imports, and $246 billion (32%) of American exports.

Although some intracompany shipments from U.S. factories are finished goods destined for customers abroad, a sizable share, especially in high-technology sectors, are goods sent overseas for further processing before being re-exported to this country. Indeed, one consequence of the transfer of all or a portion of U.S. manufacturing operations overseas is that component shipments that formerly went to a plant in Georgia or Illinois now travel to a factory in Mexico or China. What had formerly been an unremarkable domestic shipment is now a celebrated export transaction.

Trade data do not merely give a distorted impression of the way international business is being conducted. There are entire sectors of the economy whose products simply elude data collectors. Such is the case with most computer software.

The U.S. software industry was the most dynamic and internationally competitive segment of the U.S. economy during the past decade. With foreign sales currently accounting for at least half its revenues, it is also the sector most likely to confound efforts to measure international commerce and gauge its importance to local state or regional economies. The reason is the Internet.

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